Investment DAOs: What they are and How they Work

Modern advancements like Blockchain, Web3, and Cryptocurrency have revolutionized conventional ways of financial trading and investments. Now people can think about buying, selling, and investing in the digital currency world instead of building traditional investments in businesses and real estate.

As a result, these technologies have introduced new dynamics in the form of Decentralized Finance (DeFi) which is a vast area to explore. That’s where the concept of Decentralized Autonomous Organizations (DAOs) emerged. Let us now dive deeper and get to know all about this new concept.

What is a Decentralized Autonomous Organization (DAO)?

Before trying to understand what Investment DAOs are, it is essential to understand what a DAO is. Every source provides a unique definition of DAO but they all point towards the concept of having a decentralized legal structure composed of a group of entities that guides, governs, and democratizes a cryptographic agreement between two or more parties made on the blockchain technology.

This can be explained easily by saying that DAOs are fully autonomous organizations that have no central governing body and each of its members can contribute to the overall decision-making process. This depends upon several other factors and just like any other technological leap, there are some benefits and challenges as well that you will get to know.

What is an Investment Decentralized Autonomous Organization (DAO)?

An investment DAO is the one that is involved in raising and investing capital into digital assets like cryptocurrencies, NFTs, virtual real estate, etc. DAOs are widely known for democratizing the investment process while making it as much inclusive as possible.

In investment DAOs, smart contracts are used to enforce governance and agree on community rules. This also includes governance rights that are based on the holdings owned by the individual/entity in the DAO.

What Do You Need to Understand About Investment DAOs?

What Are They Composed of and How Do They Work?

The top highlighted feature of any digital currency is that it is decentralized which means it is not being controlled by a single designated authority such as a central bank or any other governmental institution.

This idea of decentralized digital currency is behind DAOs that also evolved into Investment DAOs. It works similarly to a corporation intending to encourage autonomous management and control. The entire thing is based on the blockchain smart contract that dictates the contents of the agreement and decisions are based on blockchain voting.

All the members of the DAO act as the governing bodies and key decision-makers but this depends upon their stake in the DAO. Let us take an example of two members one with 100 tokens and the other with 50 tokens. In this case, the one with bigger holdings will get a better weight of voting power.

What Are the Benefits of Investment DAOs?

Every opportunity and invention offers unique benefits. Similarly, there are various benefits due to which entities pursue this new form of legal structure. Let us take a look at its top three major benefits:

Decentralized Environment: The first and most highlighted benefit is that Investment DAOs exist in a fully decentralized environment. The entire decision-making that impacts the organization is solely taken by all the group of individuals or entities who have formed the DAO. This eliminates the need of relying on one individual or some individuals as the CEO and Board of Directors.

Provides Inclusive Access: The second biggest benefit of Investment DAOs is the inclusive access that they offer. These DAOs are known for allowing all accredited investors the opportunity to participate in the decision-making process. Depending upon their overall investment share, they get an absolute right to raise their suggested decision.

Ensures Liquid Investments: The third and most highlighted benefit of Investment DAOs is that they ensure liquid investments. Unlike traditional capital investment options, Investment DAOs allow investors to liquidate the fund before it offers to exit. This means that the investors can trade their owned tokens on a crypto exchange.

What Are the Challenges Faced by DAOs?

Just like all other technological advancements and inventions, DAOs have also got a few challenges to address. In a world where technology has reached a new horizon, still, certain things need to be addressed. Let us see those top elements that somehow influence the concept of Investment DAOs:

Lack of Education: The first and most highlighted limitation faced by Investment DAOs is the lack of education among the token holders or simply the decision-makers. This is because different members own different backgrounds, understandings, perceptions, knowledge, and decision processing capabilities. This negatively impacts the entire decision-making process and appears to be a big hurdle.

Lack of Pace: Following by lack of education, the investment DAO structure also has a limitation of time which means it requires more time to get the final decision compared to a single individual acting as the CEO of any company. Investment DAOs are comprised of numerous members therefore, it required more time to communicate everything to every member which eventually extends the decision-making process.

Lack of Security: Last but not least, lack of security is one of the biggest challenges faced by DAO structures. Followed by the hacking incident of June 2016 and witnessing the loss of 3.6 million ETH worth more than $50 million, it is quite evident that the domain requires urgent attention concerning its security.

Key Takeaways

So, Investment DAO is an autonomous authority composed of token holders who participate and contribute to the management and decision-making of the community. This shows that the power is distributed across all token holders who are responsible to cast votes.

The structure follows no central authority instead the clauses that are agreed upon the cryptographic coded agreement made between all the members of the community. This significantly highlights the level of transparency, neutrality, and open autonomy provided to all the stakeholders. It seems like Investment DAOs will become the future of capital investments once all its challenges are addressed adequately.